Investor Lawyers Blog

Hedge Funds That Own Puerto Rico General Obligation Bonds Continue to Fight for Repayment

Published on: March 5, 2019 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, three hedge funds that own Puerto Rico general obligation (GO) bonds have set up their own committee in an effort to get paid back the money they are owed. Court records indicate that GoldenTree Asset Management, Monarch Alternative Capital, and Whitebox Advisers, which collectively own about $800 million of GO debt, want to distinguish themselves from the other bondholders whose claims have recently come under question.

Their committee formation comes just weeks after Puerto Rico’s fiscal oversight board,known as the Financial Oversight and Management Board (the “Board”), raised questions about whether $6 billion in general obligations are valid. The bonds at issue were sold after March 2012, including $3.5 billion of high yield general obligations that the island sold in 2014. Monarch, Whitebox, and GoldenTree purchased their GO bonds prior to March 2012.

Puerto Rico Continues to Owe Over $70 billion in Debt.

Criminal Securities Fraud Cases Including Startup Company Charged in $48M Fraud

Published on: March 4, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Jury Convicts Investment Manager for Defrauding Lenders and Clients

A federal jury has convicted Shawn Baldwin, a Chicago investment manager, on seven counts of wire fraud. Baldwin is accused of fraudulently obtaining over $10M from at least 15 investors and lenders between 2006 and 2017. They thought that their money would go into investment products. Instead, he spent their money on his own personal bills. Meantime, his victims were given fake account statements with false information about their funds’ value so he could hide the fraud.

Individual and corporate lenders were among those that gave Baldwin their money to invest. He is accused of “exaggerating” his successful track record and professional ties, as well as mispresenting and minimizing past disciplinary action brought against him, including the revocation of his certifications with FINRA and that in 2013, the State of Illinois permanently barred Baldwin from offering investment advice or selling securities.

Investors Claims Against Santander for Puerto Rico Bond Fraud Losses are Increasing

Published on: March 2, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Although many of the thousands of cases investors in Puerto Rico bonds and closed-end funds have brought over the last five years have focused on UBS Financial Services Incorporated of Puerto Rico (“UBS-PR”), other brokerage firms in the Commonwealth engaged in the same wrongful sales practices. One such firm that has also been the subject of many new FINRA arbitrations and other lawsuits is Santander Securities, LLC (“Santander”), a division of Banco Santander Puerto Rico. The large number of cases against Santander are not a surprise given the public information about Santander. For example, Bloomberg reports that between the ends of 2012 and 2013, Santander marketed and sold over $280 million in Puerto Rico municipal bonds and close-end funds while reportedly selling its own holdings of these same securities.

Santander also has a regulatory history that suggests ongoing problems with the Puerto Rico operations for the bank. For example, in 2011, Santander settled allegations from FINRA of deficiencies in Santander’s structured product business, including those involving the sale of reverse-convertible securities to Puerto Rican retail customers when such investments were often unsuitable for them. FINRA also accused the brokerage firm of inadequate supervision of structured product sales. Santander agreed to pay a $2 million fine for these alleged deficiencies. More recently, in 2015, FINRA fined Santander $2 million and ordered restitution to Santander customers of an additional $4.3 million for Santander’s sales practices related to Puerto Rico bonds and closed-end funds. In particular, FINRA found that Santander’s supervisory system did not accurately reflect the risk of Puerto Rico investments in the period leading up to the collapse of the Puerto Rico market in 2013 and 2014. However, Santander was aware of the increased risk, and according to FINRA, instead of informing its clients of these increased risks, used that knowledge to sell its entire inventory of Puerto Rico investments by the end of October 2013, and thus missing much of the losses Santander’s own clients suffered.

In other Puerto Rico news, the 1st Circuit court of invalidated the PROMESA board which provides oversight for restructuring local debt. After the board placed Puerto Rico in a bankruptcy like process, many hedge funds and institutional corporate investors were unhappy as their investments were now in jeopardy. These entities filed a constitutional challenge to the way the board was appointed and eventually won on appeal. The ruling was not much of a win however, as the 1st Circuit refused to invalidate the board’s prior actions, which included placing Puerto Rico in the bankruptcy like proceedings, even though they invalidated the board itself.

Castleberry Financial Services is Accused of $3.6M Investor Fraud

Published on: February 28, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission (SEC) has filed fraud charges against Castleberry Financial Services, its president T. Jonathon Turner, and CEO Norman M. Strell accusing them of running an investment fund scam that defrauded at least investors of $3.6M in the last year and continues to solicit new investors. The regulator also announced an asset freeze against the company’s operators. Based in Florida, Castleberry, which is a limited liability company, and its investment offerings are not registered with the SEC.

According to the Commission’s emergency action:

Castleberry falsely represented that it had hundreds of investment properties in its portfolio, as well as hundreds of millions of dollars invested in local businesses. Biz Journals reported that Castleberry touted itself as an alternative investment manager overseeing nearly $800M in capital. Also, in reality, the company never made significant revenue from investments.

Big Banks Are Accused of Rigging Freddie Mac and Fannie Mae Bonds

Published on: February 27, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The City of Birmingham Retirement and Relief System and the Electrical Workers Pension System Local 103 have filed a proposed class action securities fraud lawsuit accusing a number of big banks of colluding with one another to rig the prices of Federal Home Loan Mortgage Corp. (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) unsecured bonds. The defendants in the case include JP Morgan (JPM), Bank of America (BAC), Citigroup (C), Barclays Bank (BARC), Deutsche Bank (DB), Credit Suisse (CS), UBS (UBS), Merrill Lynch, BNP Paribas Securities Corp., FTN Financial Securities, Goldman Sachs (GS), and First Tennessee Bank.

According to Law360, the plaintiffs contend that the bank took advantage of the dark market nature of the “private, ‘over the counter’ (OTC) market” where these bonds are bought and sold to get investors to buy the Freddie Mac and Fannie Mae bonds at prices that were “artificially high.”

Fannie and Freddie are both government-backed mortgage-finance companies. They are typically known for converting mortgages into mortgage-backed securities. This investor fraud lawsuit, however, is focused on their unsecured bonds. The proposed class contends that investors purchased the bonds because they thought they were safe, liquid, low risk, and likely to make returns. Their complaint states that the plaintiffs and other investors had not expected the “overcharges and underpayments” that resulted because of the banks’ alleged collusion.

Investor Fraud Claims Include Kiddar Capital and Stanford Ponzi Scam

Published on: February 26, 2019 | by Shepherd Smith Edwards & Kantas, LLP

$20M Ponzi Scam Results in Guilty Plea for Kiddar Capital Founder

Todd Hitt, Kiddar Capital’s founder and a member of a prominent commercial real estate family in Virginia, has pleaded guilty to criminal fraud charges accusing him of operating a $20M Ponzi fraud that involved several schemes. According to prosecutors, Hitt solicited about $30M from investors and then proceeded to use most of the money to fund his lavish lifestyle while using newer investors’ funds to pay older investors. He also allegedly made “false statements and material omissions” to investors when he didn’t tell them that their money was comingled with unrelated projects and not just the real estate and venture capital investments for which their funds were supposedly designated.

The U.S. Attorney’s Office for the Eastern District of Virginia contends that because of Hitt’s “fraudulent conduct,” investors lost about $20M. He is facing up to 20 years behind bars and is expected to pay a fine of millions of dollars. He previously settled related civil fraud charges filed against him by the US Securities and Exchange Commission.

Former Commonwealth Financial Network Broker Is Accused of Stealing $100K From Retiree

Published on: February 25, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin has filed investor fraud charges against ex-broker Bruce Worthington, who was previously licensed with Commonwealth Financial Network and after that with Founders Financial Network. Worthington was based in Massachusetts.

According to Galvin’s fraud complaint, Worthington fraudulently misappropriated nearly $100K from one client’s accounts. The client is a retiree who worked as a groundskeeper and a landscaper. He was an inexperienced investor and Worthington was his broker for over 15 years.

From 2006 to 2008, about $98K was withdrawn from the retiree’s brokerage account. The state regulator contends that the money went towards Worthington’s own personal use. The ex-broker is accused of hiding his scam by persuading the client to diversify his portfolio. He also allegedly gave the retiree falsified documents to make it appear as if the diverted funds were put into alternative investments, including structured notes and laddered bonds, and had resulted in significant returns.

Philadelphia Sues Citigroup, Goldman Sachs, Bank of America and Other Big Banks, Alleges Municipal Bond Rigging

Published on: February 21, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The city of Philadelphia, Pennsylvania is suing Bank of America (BAC), Goldman Sachs (GS), Citigroup (C), Wells Fargo & Co. (WFC), Barclays Plc (BAR), JPMorgan Chase & Co. (JPM), and Royal Bank of Canada (RBC) for allegedly rigging rates for variable-rate demand obligations (VRDOs). Philadelphia had issued over $1.6B of these bonds.

VRDOs are tax-exempt municipal securities that can be redeemed by investors early because they are tendered to banks. The banks can then remarket the bonds to other investors while charging issuers a fee.

According to InvestmentNews, the city is looking to represent a number of hospitals, municipalities, and universities with its lawsuit. The complaint contends that the banks worked with each other to manipulate the VRDO rates in secret so they could make hundreds of millions of dollars in unearned fees. The alleged rigging occurred between 2/2008 and 6/2016. The collusion purportedly involved the banks agreeing not to compete against each other for re-marketing services.

United Planners Fined $100K By Massachusetts for Inadequate Supervision of a Broker

Published on: February 20, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin’s office has fined United Planners Financial Services of America $100K for failing to properly supervise broker Thomas T. Riquier. The broker was charged last year for violating the state’s securities laws over his alleged involvement in a real estate scam that defrauded investors and others of at least $1M over 26 years.

According to the state regulator’s consent order, at one point Riquier, who is president of The Retirement Financial Center, oversaw 1,771 accounts for about 400 clients and generated more than $1.2M for United Planners, including over $500K in advisory fees. The state regulator charged Riquier, who is no longer a registered broker or investment adviser, last year with violating the Massachusetts Uniform Securities Act.

Investors of a limited partnership known as the Rowley Land Appreciation Fund Limited Partnership (The Rowley Fund) contend that Riquier told them that the property he was purchasing on their behalf would be sold for profit. Instead, he allegedly used their money to buy property that already belonged to him. Investors have yet to see any return on this property. Last year, The Salem News reported that according to investigators, Riquier made about $730K from his investor fraud.

Financial Firms: UBS Settles with Virginia’s Regulator over Broker’s Unsuitable Recommendations, FINRA Fines Texas Broker-Dealer $225K for Mutual Fund Sales Violations, and an Ex-Client Seeks $500K from Carson Wealth while Alleging Excessive Fees

Published on: February 19, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Virginia Regulator Fines UBS Financial After Its Broker Makes Unsuitable Recommendations

To settle charges brought by Virginia’s State Corporate Commission accusing a UBS (UBS) broker of making unsuitable recommendations involving gold and precious metals securities to 18 clients, UBS Financial Services will pay $319K—$289K to the clients and $30K to the state.

Virginia’s regulator contends that unsuitable recommendations were made in 2013 and 2014 and caused UBS clients to hold an overconcentration of these securities, which were not even suitable for some of them. The state said that this violated its securities rules.